CITY of LONG BEACH, CALIFORNIA Review of The
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c=9 CITY OF LONG BEACH, CALIFORNIA Review of the License and Operating Agreement between Spectacor Management Group (SMG) and Sporting Life, Inc., Doing Business as the Long Beach Ice Dogs June 21,2005 Audit Team Sam A. Joumblat, Deputy City Auditor John C. Coon, Audit Manager OFFICE OF THE CITY AUDITOR City of Long Beach 333 W. Ocean Blvd. GARY L. BURROUGHS, CPA Long Beach, CA 90802 City Audilor Telephone: 562-5706751 Facsimile: 562-570-6167 June 21,2005 Craig Beck, Acting Director Community Development Department We have performed a review of the license and operating agreement (Agreement) between Spectacor Management Group (SMG) operators of the Long Beach Convention and Entertainment Center and Sporting Life, Inc., doing business as Long Beach Ice Dogs, owners of the Ice Dogs professional hockey team (Ice Dogs). This agreement grants the Ice Dogs the exclusive use of the Arena for the presentation of ice hockey in the City of Long Beach. The purpose of our review was to determine whether all terms and other contractual obligations were fulfilled in compliance with the agreement. Our review procedures included: Obtaining an understanding of the agreement and its provisions, including a letter of understanding regarding SMG’s incentive fee calculation. Discussions with Community Development and other City personnel, SMG employees and Ice Dogs management. Review of Ice Dogs’ Income Statements and Ticket Master attendance reports. Review of SMG’s prepared Income Statements of the Ice Dogs’ operations from 1999 through 2004 seasons and the distribution of available income to the City and SMG. Review of Ice Dogs’ season and group ticket sales and distribution of rebates to the Ice Dogs for the 1999-2004 seasons. Based on the results of the audit procedures performed, we found no exceptions to the terms and conditions of the agreement between SMG and the Ice Dogs and the letter of understanding between SMG and the City. However, during the past five years that the Ice Dogs have played in the Arena, the City has incurred a net loss of about $1.5 million. Additionally, the Community Development Department estimates that the City could receive up to $1.5 million per year in net revenue if the Arena were used as an indoor concert or event venue, instead of hosting Ice Dogs’ games. File Name: -5555552.doc Ice Dogs Contract Review June 21,2005 Page 2 of 6 The attached report presents historical background on the contract along with operational data. We would like to thank the Community Development Department, SMG, and the Ice Dogs for their cooperation during this review. Sincerely, Gary Burroughs, CPA Sam A. JoumMt, CIA Deputy City Auditor cc: Reggie'Harrison, Deputy City Manager Michael Killebrew, Director of Financial Management Michael Conway, Property Services Manager Ice Dogs Contract Review June 21,2005 Page 3 of 6 Backqround The City and SMG entered into a written management agreement dated February 12, 1991 for the management and operation of the Long Beach Convention and Entertainment Center (Contract No. 21667). In 1996, the City, SMG and the Ice Dogs entered into a supplemental agreement (Contract No. 24555) for the purpose of bringing the Ice Dogs professional ice hockey team to the Long Beach Arena for a five-year period, with options for two additional five- year periods that the Ice Dogs can exercise. This season marks the gthyear that the Ice Dogs have called the City of Long Beach their home. The team was originally founded as the San Diego Gulls in 1989 and was a member of the “AAA”International Hockey League (IHL). The team played as the San Diego Gulls (in San Diego) for five seasons and sat out the 1994 - 1995 season. In 1995, the team moved north and played for one season as the Los Angeles Ice Dogs and in 1996 moved to Long Beach and changed their name to the Long Beach Ice Dogs. The team switched their league affiliation to the West Coast Hockey League (WCHL) for the 2000-2002 seasons and then to the East Coast Hockey League (ECHL) for the 2003-2004 season where they continue to play today. The team is considered an “AA” professional team with an affiliation to the Montreal Canadians NHL team. During our review of the Ice Dogs financial statements, we noted that the team has not made a profit since moving to Long Beach. Annual ticket sales and attendance have declined considerably over the past eight seasons as illustrated in the table below: Season Win Percentaae Attendance Ticket Sales 1996-1997 359 162,044 $2,103,924 1997-1998 ,646 153,869 $1,991,061 , 1998-1999 ,600 136,289 $1,418,910 1999-2000 ,537 149,631 $1,665,024 2000-2001 .569 110,273 $1,290,121 2001 -2002 .569 100,398 81,058,583 2002-2003 .306 87,416 $ 862,649 2003-2004 ,354 65,368 $ 751,175 The National Hockey League is currently on strike, and as a result, the 2004 - 2005 Ice Dogs average game attendance has increased over recent seasons. However, the Community Development Department (CD) believes the increased attendance is not significant and may not continue once the NHL settles their strike. The agreement gives the Ice Dogs part of the game revenues as follows: ice Dogs Contract Review June 21,2005 Page 4 of 6 50% share of the revenue payable from the sale of concessions and food catering. 50% of the parking revenue, but not less than $2 per car, based on game attendance, not actual parked cars. 100% of the promotional.‘ However, during the term of the agreement, if annual season ticket sales do not total at least 3,0002and group sales per game do not average 200, the Ice Dogs will be rebated the following additional game revenue: The remaining shares of revenue payable to the City for parking: concession and catering. $1.000 of the $5,000 rent paid, per game. The following table summarizes the revenue rebates received by the Ice Dogs during the past 5 seasons: Shared Revenue Rebated to the Ice Dogs3 Total Promotional Season Concessions Catering Parking -Fund4 -Rent’ -Total 1999-00 $ 335,978 $2,405 $239,822 $ 0 $ 44,000 $ 622,205 2000-01 $ 240,710 $ 641 $179,648 $ 0 $ 39,000 $ 459,999 2001 -02 $ 214,820 $1,612 $146,036 $14,603 $ 39,000 $ 416,071 2002-03 $ 185.568 $1.172 $177.944 $15.266 $ 36.000 $ 415.950 2003-04 $ 137,302 &l&5 $114,086 $11,406 $ 38:OOO $ 302:199 Totals $1,114,378 $7,235 $857,536 $41,275 $196,000 $2,216,424 The above rebates reduce convention center profits, which then have a negative impact on SMG’s incentive fee. Therefore, SMG was made whole on the above- shared revenue based on a letter of agreement the City of Long Beach and SMG signed on January 7, 2000, which stated in part, “In the past, the City has acknowledged in writing each year that the Ice Dogs Rebates are to be added back to the net operation income of the Center when calculating the amount, if any, of SMG’s incentive fee. Conclusion: The City and SMG agree that for fiscal year ending September 30, 7999 and all subsequent years that the I Section 23, (a) of the operating agreement defines the promotional fund as “. The method of determining the amount of revenues attributable to Licensee’s patrons at Licensee’s events shall be to calculate the attendance at Licensee’s events and assume 2.75 person per car. The estimated difference between 2.5 persons per car and 2.75 persons per car shall he used by the parties to fund a special CityiSMG promotion for the benefit of the Ice Dogs.” ‘Since moving to Long Beach, the Ice Dogs have never exceeded 3,000 season ticket sales. 3 Ice Dogs received 100% of all shared event revenue. 4 Ice Dogs receive 100% of the Promotion Fund per the contract. $1,000 rebate of rent paid, per game. (4) Ice Dogs Contract Review June 21,2005 Page 5 of 6 amount of the Ice Dogs’ Rebates will be recorded as an operation expense of the Center and then added back to net operation income in order to calculate SMG’s incentive fee ...” What this means is that the City adds the Ice Dogs’ game revenue rebates back to available income for the purpose of calculating SMG’s 25% incentive fee. This resulted in SMG being paid about $554,000 (25% of $2,216,424)in incentive fees based on the Ice Dogs’ game revenue rebates paid. The Long Beach Convention and Entertainment Center has lost about $1.2 million as a direct result of hosting Ice Dog games in the Arena as summarized in the following consolidated Income Statement: Long Beach Convention 8 Entertainment Center Long Beach Ice Dogs Income Statement for Past 5 Seasons 1999-00 2000-01 2001-02 2002-03 2003-04 Total Income: Arena Rental Income’ $132,000 $117,000 $156,000 $144,000 $152,000 $701,000 Miscellaneous Income $4,920 . $5,992 $9,097 $9,852 $11.184 $41,045 Gross Income $136,920 $122,992 $165,097 $153,852 $163,184 $742,045 Expense: Maintenance Labor $42.722 $2,669 $6,560 $10,524 $10,794 $73,269 Changeover Labor $117,726 $96,267 $1 11,055 $105,445 $57,012 $487,505 Stagehand Labor $30,543 $12,946 $1 1,078 $11,773 $13,207 $79,547 Crowd Mgmt. Labor $1 15,226 $88,921 $94,804 $95,653 $92,832 $487,436 Box Office Labor $1,316 $585 $1,901 EMT/Med Services $4,222 $3,632 $3,565 $4,113 $4,122 $19,654 Supplies $2,242 $3,209 $3,467 $3,404 $1,883 $14,205 Cleaning Labor $152,108 $124,577 $115,924 $110,445 $88,380 $591,434 Parking’ $76,830 $51,937 $189 $2,341 $29,768 $161,065 Telecommunication $4,708 $4,303 $3,245 $2,819 $2,012 $17,087 $547,643 $389,046 $349,887 $346,517 $300,010 $1,933,103 Net Loss ($410.723) ($266,054) ($184.790) ($192,665) ($136,826) ($1,191,058) Because of the revenue sharing incentive fee between the City and SMG (distributed 75% and 25% respectfully), the City’s share of the losses for the past five seasons is about $893,000 (75% of $1,191,058).